FASB Mulls Retroactive Expensing of Stock Options

With dozens of companies deciding to switch their method of accounting for stock options this year, the Financial Accounting Standards Board (FASB) agreed on August 7, 2002 to consider a significant change in the transition requirements that apply to the year of the switch.

Specifically, the board asked its staff to look into two possible changes:

  • A retroactive restatement method that would allow companies to apply the change retroactively to awards granted in prior years going back to 1995.
  • Another method that would allow companies to expense any new options issued since the beginning of the fiscal year, as well as the unvested portion of previous awards.

Neither method is allowed under current rules set by Financial Accounting Standard No. 123, Accounting for Stock-based Compensation. FAS123 uses a "clean slate" method. This method allows companies to expense stock-based compensation granted to employees since the start of the year in which the expensing of options is commenced. It prohibits companies from expensing any portion of awards granted in prior years, except to the extent those awards are modified or settled.

According to an Action Alert issued by FASB on August 9, 2002, two tentative decisions have been made: (1) Companies that decide to expense options will be able to choose the FAS123 method or either of the two alternatives described above. (2) Companies that don't choose the retroactive restatement method will be required to disclose pro forma net income and earnings per share as if the FAS123 method of expensing options had been applied to all awards in all periods presented in their financial statements.

More Changes Possible

Ernst & Young (EY) has been warning companies of the potential for more changes. A recent EY alert said, "Reports continue to surface that the chairman of the FASB, Robert Herz, believes that if the International Accounting Standards Board issues a standard requiring all employee stock-based compensation to be recognized at fair value, the FASB will at that time evaluate whether similar accounting should be required under U.S. GAAP."

The Financial Times reported that FASB has said it will put out for comment stricter measures being considered by the International Accounting Standards Board, with a view to producing its own proposal in spring of 2003. ("FASB Lays Out Option Choices," August 7, 2002.)

-Rosemary Schlank

You may like these other stories...

It's not a reality—yet—but accounting software is poised to eliminate accountants. We are at a tipping point for many similar professions: online education replacing professors, legal software replacing...
Inversions: Loophole Is the ProblemJacob J. Lew, the U.S. Treasury Secretary, published an opinion piece in the Wall Street Journal that "the system has become full of inefficiencies and special-interest loopholes. That...
School tax breaks get House support as Democrats objectRichard Rubin of Bloomberg reported that the House of Representatives on Thursday voted to expand and simplify tax breaks for education as Republicans continue to pass...

Upcoming CPE Webinars

Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.